Democrats Kick Around Idea of Securities Transaction Tax

Securities Transaction Tax

Some congressional democrats may find the idea of a punishing tax on securities transactions appealing, but this once again demonstrates their financial ignorance.

There are several members of Congress on the Democratic side that are all for looking to punish the wealthy through various new tax proposals such as higher taxes on very high income or wealth. While at least part of the goal with these proposals is to raise more tax money, there’s a darker side to their motivation, their clearly demonstrated disdain and even anger toward the wealthy, who they see need to be punished.

Some left-wing democrats have little trouble mustering up enough anger to want to strike back at wealthy people, but few of us would hold that amassing wealth is in itself an evil pursuit that the government should take specific action to curtail. It is one thing to ask the wealthy to pay a greater share, and we do, but quite another to specifically target them on grounds that pretend have some sort of moral validity.

Fortunately, it is likely that enough people in Congress have at least a minimal idea of how this selective punishment for being wealthy that these recent ideas that have been put forth to do so would be such a bad idea, not only in principle but especially on the effect that they would have on the economy. Simply put, if you tax these people too much, they will either find ways around this or just leave the country.

The aftermath of such a scheme would be that these attempts would serve to undermine the economy significantly, which those who are sufficiently aware of the ramifications of such acts will readily appreciate and attest to. A lot of people in Congress don’t have much of a background in economics or finance though, and what little they may know may be muted by the rage they feel and their desire for what they consider retribution.

This lack of understanding is also clearly evident in the latest escapade on this front, where Rep. Peter Defazio of Oregon and several of his left-wing Democratic cohorts are planning on introducing a bill in the House to place a 0.1% tax on securities transactions.

Raising revenue for the government is obviously part of this, and if passed, this is projected to raise almost $800 billion in new tax revenue. We get taxed on a lot of things, and securities transactions is one of the things we don’t bother taxing on. It seems like such a small amount per dollar transacted, just a tenth of a penny, and surely those who would pay it, the wealthy, won’t miss this small amount since they already have so much, way too much in fact in the estimation of this idea’s supporters.

Why Would We Want to Reduce Market Efficiency?

What is perhaps most interesting about Rep. Defazio’s proposed bill is his telling us that, aside from the goal of raising revenue, it also seeks to “reduce high frequency trading.” Why we would ever want to do that isn’t made clear at all, but if given that this is a major goal, this speaks volumes about how little Defazio and his comrades know about financial markets.

The sole goal of financial markets is to facilitate trading, and the more it facilitates, the more efficiently it functions. We enjoy great advantages these days by way of how well-developed our financial markets are, and particularly with the advent of electronic trading, and even automated trading, this does serve to make these markets far more efficient nowadays than we could ever have dreamed about not that long ago.

While markets naturally gravitate toward efficiency, which is defined as optimal ease of access and cost efficiencies in trading financial assets, attempts to restrict this for its own sake are simply asinine. There are certain restrictions that markets place upon themselves for reasons other than efficiency, like curtailing trading when prices fall very dramatically, but this is limited to only when deemed to be sufficiently justifiable.

To seek to do this with no other reason than it’s a good idea to restrict or limit “frequent trading” is quite another matter, and this frequent trading is actually the backbone of financial markets these days in fact, comprising the majority of all transactions.

If we cut the margins on these trades to the extent that Defazio may hope, what we are left with is participants who wish to trade assets but are prevented from doing so artificially. This causes a stagnation and is quite the opposite of what markets are there to do.

While individual investors probably would not notice this very much, even though this would result in an increase in trading costs to them, if an individual wanted to enter or exit a position and was prevented in doing so by the costs, this would leave people missing out on opportunities, or holding positions that they really should not be in otherwise.

This tax would most definitely affect large financial institutions though, to the extent that it would reduce liquidity, and this would definitely have a negative effect upon markets and the financial world in general. It’s not even just the fact that their profits would be cut, as these institutions are trading the money of their clients, and this would all trickle down.

The United States Itself Faces the Pointy End of this Stick

What may be the most amusing thing about all this is that the institution that would be most affected by this tax, by far actually, would be the one we call the United States. The U.S. government, directly or indirectly, would be exposed to the negative effects of such a tax more than anyone. Simply put, it will cost more for them to borrow. Given how much of a crisis the country is in with its mountain of debt, intentionally making its own financial dealings less efficient is going to have some real consequences to the country’s bottom line.

This is all apart from the effects that sucking out almost $800 billion a year out of financial markets would have, and the resulting effect of this huge amount of money lost in the economy. That alone should have us steering well clear of hare-brained ideas such as this one.

Whenever we raise taxes, it has restricting effects upon the economy, and the idea of doing this directly to financial markets is perhaps the scariest application of taxation we can conceive. Many Americans have their entire life savings and their futures on the line here, and depend greatly on orderly and efficient markets, not ones that lose almost $800 billion a year to Uncle Sam. The losses here will be borne not just by big institutions, but all the way down to the grass roots.

To add to all this, taxation is supposed to be on income, where you make a certain amount and you share part of it with the government. That’s why we call it income tax, and while we also do this indirectly with sales and other consumption taxes, the money taxed is all income ultimately.

Securities transaction taxation would not apply to income but to principal amounts, and this isn’t just unfair, it doesn’t even make sense. This would be like saving up to start a business, from income already well taxed, and the government then taking away a piece of your business right from the start, just because.

We want to be encouraging investment, not looking to curtail it. Luckily though, this bill has absolutely no chance of passing, because there are enough people in Congress who have more sense than this. There still are the fringe politicians who insist on having their say and keep coming up with terrible ideas like this, which they are entitled to do, but thankfully they are on the fringe, where they belong.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.